The Investment Column: Firing on all cylinders - but Whitbread's success is in the price

Halma; GW Pharmaceuticals
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The Independent Online

Our view: Fully valued

Share price: 1,117p (+20p)

Yesterday's trading statement from Whitbread was the most positive for some time. The star of the leisure conglomerate, the budget hotel chain Premier Travel Inn (PTI), continues to shine, the Costa Coffee brand is doing so well that the company is taking it into China, and even the David Lloyd chain of fitness clubs has finally turned the corner. The bits of the business that are still struggling are either being sold off or are under review - 235 stand-alone Beefeater and Brewers Fayre pub restaurants have been put on the block while the future of TGI Friday's and Pizza Hut is being reviewed.

While Alan Parker, the chief executive, has strenuously denied rumours that the multibranded business would be carved up, he is doing just that. The 46 Marriott hotels are gone, along with the Chiswell Street brewery whose sale last year severed the last tie with Whitbread's 255-year-old beer heritage.

Mr Parker's stated focus is on the leading PTI and Costa brands which have embarked on an aggressive expansion drive. The budget hotels contribute more than half of group profits and that side of the business could soon be beefed up with the purchase of Travelodge, which would have the extra benefit of taking out an aggressive rival. Whitbread is thought to be inching closer to a deal with Travelodge's private equity owners, Permira.

The group posted like-for-like sales growth of 1.6 per cent in the 13 weeks to 1 June with PTI enjoying a 6.7 per cent rise.

The shares have been underpinned by the business restructuring - the recent high disposal price achieved by Punch Taverns for 290 Spirit pubs bodes well for Whitbread's pub restaurants and has fuelled hopes of a £400m-to-£500m deal. Parts of the proceeds could be returned to shareholders, on top of yesterday's £400m return. However, all this has already been priced into Whitbread shares which now look fully valued.

Halma

Our view: Avoid.

Share price: 186p (+3.75p)

Halma makes fire and smoke detectors, lift sensors, devices that detect leaks in pipes and gas installations and theatre lighting. What connects these businesses to justify them all being under one roof? Halma's answer is that the common thread running through all its operations is safety for people in buildings and places of work.

In practical terms, it means the group's various divisions can share development know-how and help one another when it comes to marketing new products in countries where Halma has a presence.

Under the stewardship of Andrew Williams, the group's structure has been greatly simplified. Since he took over a year ago he has focused the firm on three core divisions, down from six previously. Mr Williams has also sold off a series of underperforming assets, bought a series of high-margin ones and invested heavily in research and development.

Yesterday's annual results showed that his strategy is working well. Pre-tax profits from continuing operations for the year to 1 April rose to £58m from £48m while the number of new products the company launched nearly doubled last year.

Halma also unveiled a 5 per cent rise in its annual dividend to 6.83p a share for the year. This is the 27th consecutive year that it has posted a rise in its payout to shareholders. At yesterday's closing price the shares yield a solid 3.6 per cent. Although the group is likely to continue to deliver profit growth for some time to come, now is not the time for investors to buy into Halma which trades at a sizeable premium to peers. There is better value elsewhere in the stock market.

GW Pharmaceuticals

Our view: Wait

Share price: 74.5p (- 3.5p)

GW Pharmaceuticals hopes to have found a blockbuster drug in Sativex, a mouth spray that is derived from cannabis. The biotech company believes that its product can relieve the pain symptoms of multiple sclerosis and cancer and hopes to have the treatment on the market in the US and Europe one day.

There was some confusion in the wake of yesterday's interim results from the group as to whether there had been a delay to its timetable. The state of expectations as they stand now is that GW Pharmaceuticals is unlikely to get approval for Sativex before the end of next year in Europe and no sooner than 2010 in the US.

Before this happens, the company is likely to remain loss making. Yesterday's results showed that GW Pharmaceuticals had made a net loss of £6.2m in the six months to 31 March 2006, compared with £5.1m for the same period in 2005. GW Pharmaceuticals has raised £70m from investors during its history and is valued at £88m by the City.

Although the potential market Sativex is addressing is significantly greater than this, readers would do well to wait for the drug to get approval in the European Union before buying into the story.

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